Emerging Markets or Emancipating Economies?

As for the so called emerging markets, not only should we not get too easily excited by this seemingly attractive concept, which, sadly, happens to too many economists but, on the contrary, we need to defy it. The term “emerging markets” was proposed not so much in relation to a society that allocates its resources as in reference to a very narrow category of financial markets in those economies. So it is a very objectifying approach: it’s not people that matter but their money. A neoliberal economist will probably even applaud it but somebody oriented towards a social market economy must oppose. Looking at countries that are trying to narrow the gap in development level, one needs to treat them as subjects and see the people while counting the money.

Hence, I suggest we abandon the term “emerging economies”, that is that we no longer limit ourselves to analyzing further and further countries whose financial markets have widened enough to “emerge” internationally as a result of liberalization and now offer the opportunity to speculate. They emerge as a place to strike good deals, not necessarily for the benefit of people from those markets but sometimes at their expense and surely for a speculator’s own benefit.

Looking at things from the perspective of development economics and political economy of the future, I suggest we talk of “emancipating” economies. It’s a huge difference compared to “emerging” markets as this time they are treated like subjects rather than objects. While in the case of “emerging markets” society is something less significant, a part of the game revolving around speculation, money and profits, in an “emancipating economy” society becomes crucial. The lynchpin here is a society that allocates its resources. Obviously, one existing in market economy conditions, in financial environment, without turning its back to the unavoidable market speculations and pursuit of gain but also without submitting to them as the master of the whole system.

What does it implicate for the future? How may the position of respective country groups in the world evolve? Will the earlier division into “three worlds” disappear completely and will the present division into “two worlds” of highly developed countries and “emerging markets” fade away? Will the future course of globalization contribute to these differences vanishing gradually?

To reduce the conflict potential of the present phase of globalization, the greatest possible number of less advanced countries must emancipate. The world composed of pieces so diverse that in extreme cases production capabilities and the resulting standard living in the richest countries is over a hundred times higher than in the poorest ones, is unsustainable. If we were to keep up such a scale of imbalance, the world would have to tumble down. Destabilization, revolutions, wars would be unavoidable. In other words, with present situation maintained in the long run, a dark future would start to turn from possible and undesirable into an unavoidable one.

A reasonable response to that challenge is the emancipation of countries and societies on their way up, both those getting out of the erstwhile “Third World” and those originating from the “Second World”, in most cases already industrialized and characterized by a relatively high standard of human capital. In the latter case, that of countries undergoing post-socialist transformation, it should be easier as their societies have a per capita GDP which is about 50 percent higher than the world average and a human capital is of a relatively high standard. While the average income for humanity as a whole stands at around USD 12 thousand (measured at PPP), for the 126 million in European post-socialist countries, including post-Soviet Baltic states: Estonia, Latvia and Lithuania, already part of the European Union, it’s approximately USD 17,600, and for nearly 280 million people living in the remaining former Soviet republics, it’s about USD 12,400 (in Russia with a population of 138 million, it’s 17 thousand). So for over 400 million people living in Central and Eastern Europe and former USSR, this gives an average income at PPP of slightly over USD 14 thousand.

When it comes to the quality of human capital, measured most often with the human development index, HDI, this part of the world looks even better and more than one country can already feel emancipated, and free of insecurities. The richest of post-socialist countries, Slovenia (with a population of just two million and so having hardly any impact on the regional average) ranks only thirtieth in the world when it comes to per capita GDP (USD 29 thousand at PPP), while it ranks as high as 19th in terms of human capital, with an HDI of 0.844. If we adjust the index for inequality in income distribution, the way UNDP, United Nations Development Program, has done since 2011, then Slovenia goes up to the 10th place, between Switzerland and Finland. At the opposite end of this spectrum is the poorest post-socialist country, Tajikistan, with a per capita GDP of merely USD 2,100 and an HDI of 0.607, is not even among the top hundred countries listed. To show these countries from this perspective compared to the whole world, let’s mention extreme global HDIs: the list begins with Norway and Australia with indexes of 0.943 and 0.929 respectively and ends with the Congo and Zimbabwe with very low HDIs, 0.239 and 0.140 respectively.

Let’s explain that UNDP, starting from 2011, changed its methodology for HDI calculation. These days, it’s slightly more complicated, but probably more adequate as a consequence. Earlier on, a relatively simple composite coefficient was in use, whose final value was determined in equal measure (one third each) by per capita GDP (at PPP), by the education index measured with literacy ability and gross enrollment rate and by population health assessed with life expectancy index. In theory, the maximum of this measure equals to one. It is also the case of the present method, which would happen if three conditions were simultaneously met:

(1)  full enrollment rate and no illiteracy;

(2)  average life expectancy of 83.4 years, which is an extreme level recorded in a data series for the years 1980-2011;

(3)  a per capita GDP of USD 107.721, also at the highest level for the years 1980-2011.

At present, HDI is still a resultant of three partial coefficients but it is calculated as a geometric average (or a cube root of their product), rather than as their arithmetic average.

In addition, the coefficient calculated this way is adjusted for inequality in income distribution, which gives IHDI (inequality-adjusted Human Development Index). In the event of a perfect equality IHDI would be identical to HDI. In reality, those indexes deviate from each other the more the bigger the inequality in income is. Consequently, while in the egalitarian Sweden HDI is 0.904, and IHDI, taking account of distribution ratios, is 0.851, in South Korea, which is only slightly less developed in general, relevant indexes are 0.897 and 0.749. While in Poland HDI has increased to 0.813, like it has in Chile, where it amounts to 0.805, IHDIs in these countries are 0.734 and 0.652 respectively, as the disproportions in income distribution are greater in Chile than they are in Poland. Human capital indexes in terms of HDI are similar but, all in all, considering income relations, living quality is better in Sweden than in Korea and people have it better in Poland than in Chile.

Incidentally, it’s a food for thought that on the African continent it was Libya that could boast the highest HDI (0.755 in 2010), one of the countries where the “Arab Spring” rebellion unfolded the most dramatically. Let’s hope that this index will not fall as a consequence of the political and economic transformations taking place. This incident, not isolated anyway, demonstrates clearly that even though HDI and IHDI are definitely better metrics for evaluating the level of social and economic advancement level than per capita GDP is, it is still an imperfect indicator which ignores a number of factors that co-determine the quality of life and human satisfaction with it. Or lack thereof.

Considering the smaller gap between highly developed countries and economies undergoing a post-socialist political transformation, especially the European ones, the latter have greater chances for emancipation than countries from other parts of the world that are still lagging behind. Economies integrating with highly developed countries as part of the European Union can be especially hopeful. Together with Croatia, since mid-2013 there are 11 countries like that but, over time, there will be more of them. Leaving aside post-Soviet republics, whose accession remains an open question, all post-socialist European countries should join the European Union. Such is the logic of temporal and spatial co-existence of historical processes taking place on the European continent: regional transnational integration and post-socialist systemic transition.

Full integration, manifesting itself, most of all, in an institutional convergence, is a good way to catch up and reduce differences in development. Though the integration makes this process faster, this may take a long while, even up to several generations. That’s how long it took to level the differences between the rich north and the less affluent south of the US, which took a century and a half since the end of the Civil War; meanwhile the process of bridging the gap between the south and north of Italy continues to this date. This is why Balkan economies, which managed to join the EU in the first decade of the 21st century, will emancipate faster than those that won’t get accepted into this bloc until the third decade.

This has specific implications for the processes involved in integration, which can already be viewed as an instrument of emancipation in other world regions, from Latin America and the Caribbean to Sub-Saharan Africa, North Africa and Middle East, to South Asia and South-East Asia. The more  economies become regionally integrated the easier it will be for them to improve competitiveness, the faster growth rate they will reach and the easier it will be for them to bear the costs of development. Their emancipation, with a society treated as subject rather than object, will be mostly expressed in a better quality of market institutions so a better regulation of the economy, from the perspective of growth dynamics. Thus defined emancipation process will result in an ever growing general development level, a higher living standard and a greater social satisfaction.

Undoubtedly, for emancipating countries these processes must continue for many, many years to come while following on the path of fast economic growth. In this case, there will be no development and progress without a significant increase in the output. What does a “fast growth” mean? It’s not an absolute but rather a relative term. “Fast” should be defined as emancipating economies growing twice, three times higher than rich countries that enjoy a GDP per capita of over USD 30 thousand. This means a growth dynamics of almost the double of the world average. In terms of quality, fast growth is a rate which provides economies at a medium level of development with a chance to achieve the present level of highly developed countries over the span of one or two generations and, in a similar time horizon, underdeveloped countries with a chance to achieve the level now typical of medium level countries.

Let’s emphasize the power of the compound interest here. To double the income level in just one decade, an average annual growth of 7.2 percent is enough. To double the output level in twenty years, you need to maintain an average of 3.5 percent rate. In the former case, after half a century the income is 32 times higher (sic!), in the latter it’s also higher, by a pretty impressive 460 percent. Let me stress, right away, that, in the economic practice, the dynamic of the former kind is impossible in such a long period on a macro-scale, while a five-fold increase of output in five decades under very favorable circumstances should not be ruled out. Certainly, this observation does not hold good for the world as a whole as maintaining such a high growth rate for the whole fifty years is neither possible, nor desirable. There are emancipating countries that are able to double their income and, at the same time, consumption, which is neither automatic nor the same, in just one decade, for example Taiwan in the past and Vietnam recently.

Professor Kolodko is the author of international bestseller “Truth, Errors, and Lies: Politics and Economics in a Volatile World” (Columbia University Press, 2011) which has been nominated for the Michael Harrington Award “for an outstanding book that demonstrates how scholarship can be used in the struggle for a better world.” He writes a blog at www.volatileworld.net